Interest rates have been the dominant factor causing real estate deal activity to abate, and the coming reduction in rates will undoubtedly cause a thaw across the market.  However, that’s not the full story with many general and sector-specific trends driving investment activity.

General Trends in the Real Estate Market in 2024

1. Changing Consumer Behaviors: The concept of homeownership is evolving, with many individuals finding it financially challenging due to high prices and interest rates. This situation is leading to an increased preference for renting over buying.

2. Migration to Sun Belt & Secondary Markets: The migration of the US to the Sun Belt continues and doesn’t appear to be losing momentum.  Also, with affordability issues in traditional locales, there is an emerging trend of migration to secondary markets. This shift is further fueled by the prevalence of remote and hybrid work options, which allow for greater flexibility in choosing living locations.

3. Emerging Distressed Opportunities:  The market has been waiting for distressed opportunities without a lot of opportunities.  That might change in 2024 due to a combination of over supply in some markets, shifting demand patterns, challenging debt markets, and cautious buyers.  Some are even saying it could turn into a “tsunami of distress”.

4. Mixed-Use Developments: Investors are increasingly interested in mixed-use properties that combine office space with residential, retail, or leisure facilities, providing diversified income streams and resilience against market fluctuations in individual sectors.

5. Value-added & Opportunistic Deals: With rates high and cap rates still relatively low, investors are seeking more value-added and opportunistic deals where development or repositioning can create value.

Sector-Specific Trends in the Real Estate Market in 2024

1. Office Sector: The normalization of hybrid working arrangements is expected to continue limiting the growth of office demand. Rehabilitation or conversion of underperforming office buildings to other uses will become more attractive and financially viable as interest rates begin to fall.  Miami is seeing outsized office demand given the large population migration into the state.  Top tier office space is attracting tenants, but mid and lower tier office space is struggling.

2. Retail Real Estate: Retail real estate fundamentals are expected to remain strong due to the scarcity of new construction deliveries over the past decade. This sector may continue to benefit from stable demand despite economic uncertainties.

3. Industrial Market: The industrial market is anticipated to remain healthy, with net absorption levels on par with those of 2023. This sector's resilience is likely due to continued demand for logistics and distribution centers.

4. Multifamily Sector: A significant influx of new apartment supply is projected, which will likely temper rent growth and cause strain amongst developers delivering new produce into the market. This increase in supply may balance the rental market, making it more accessible to a broader population.  However, new starts are down significantly, causing deliveries to likely decrease in 2024 and more significantly in 2025.

5. Hotel Industry: The hotel sector might face challenges to revenue per available room (RevPAR) according to CBRE growth due to factors like competition from alternative lodging sources and a slower economy. Hotels are increasingly offering unique, localized experiences to guests, such as cultural immersion, wellness programs, and bespoke services, which drive higher room rates and occupancy levels, thereby boosting RevPAR.  However, a decrease in international travel by Americans could benefit the domestic market.

6. Data Centers: There is an increasing demand for new data center development, which is likely to attract more institutional investment. In 2024, the data center industry is focusing on addressing power supply challenges and exploring alternative power sources, such as small modular reactors and renewable energy, due to increasing power demands and limitations of the power grid. The adoption of generative AI is driving a shift towards hybrid cloud environments and necessitating modernization of on-premises infrastructure, with an uptick in the adoption of on-premises services expected. Supply chain disruptions are impacting data center development, leading to extended delivery dates and a growing emphasis on strategic partnerships and innovative design approaches like modular construction.

7. Residential Market: The residential sector is experiencing a paradigm shift towards rentals due to high home prices and interest rates. Approximately 35% of the residential property sector has recently reduced pricing at the start of 2024, only slightly lower than the elevated levels of approximately 38% at the start of last year according to Altos Research.  We’re starting the year with approximately 5% more listing than last year.  The cost differential between buying and renting is significant, with buying averaging ~50% higher according to HousingWire. This trend is leading to a focus on rentals, which offers more choices and less competition for renters.  Ironically, housing pricing continues to be one of the largest contributors to inflation, which keeps rates up and in turn contributes to a higher price of housing.  New supply of housing will help with an estimated 680k new single-family units under construction (seasonally adjusted) according to the Federal Reserve Bank of St. Louis , but this is below the recent peak of over 800k units.  Rate drops in Q4 will start to help the residential market.

8. Construction and Development: In 2024, the real estate construction sector is dealing with stabilized but significantly higher costs than pre-pandemic levels, with construction commodities being about 35% to 40% higher and labor costs rising by approximately 4% annually. Additionally, challenges in finding skilled labor continue to contribute to higher costs.  The nonresidential building sector is experiencing strong spending, but growth is expected to slow, with a modest increase of 2% in overall building spending anticipated.

9. PropTech: The PropTech space facing challenges due to rate hikes and a slowdown in venture capital investment, leading to financial struggles for companies in this sector. The focus in 2024 is expected to shift towards profitability, with an emphasis on monitoring balance sheets and expanding product offerings.  Investment is surging in smart building technologies that enhance energy efficiency, building management systems, and tenant experiences, thereby increasing property values and attracting environmentally conscious tenants and buyers.

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